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Understanding the Supply Chain

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 Learning Objectives
1. Discuss the goal of a supply chain and explain the

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impact of supply chain decisions on the success of a
firm.
2. Identify the three key supply chain decision phases
and explain the significance of each one.
3. Describe the cycle and push/pull views of a supply
chain.
4. Classify the supply chain macro processes in a firm.

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 What is a Supply Chain?
• All stages involved, directly or indirectly, in fulfilling a

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customer request
• Includes manufacturers, suppliers, transporters,
warehouses, retailers, and customers
• Within each company, the supply chain includes all
functions involved in fulfilling a customer request
(product development, marketing, operations,
distribution, finance, customer service)

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 What is a Supply Chain?
• Customer is an integral part of the supply chain
• Includes movement of products from suppliers to

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manufacturers to distributors and information, funds,
and products in both directions
• May be more accurate to use the term “supply
network” or “supply web”
• Typical supply chain stages: customers, retailers,
wholesalers/distributors, manufacturers,
component/raw material suppliers
• All stages may not be present in all supply chains
(e.g., no retailer or distributor for Dell)
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 What is a Supply Chain?

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FIGURE 1-1

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 Flows in a Supply Chain

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FIGURE 1-2

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 The Objective of a Supply Chain

• Maximize overall value generated

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Supply Chain Surplus
= Customer Value – Supply Chain Cost

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 The Objective of a Supply Chain
• Example: a customer purchases a wireless router
from Best Buy for $60 (revenue)

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• Supply chain incurs costs (information, storage,
transportation, produce components, assembly, etc.)
• Difference between $60 and the sum of all of these
costs is the supply chain profit
• Supply chain profitability is total profit to be shared
across all stages of the supply chain
• Success should be measured by total supply chain
profitability, not profits at an individual stage

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 The Objective of a Supply Chain
• Customer the only source of revenue

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• Sources of cost include flows of information,
products, or funds between stages of the
supply chain
• Effective supply chain management is the
management of supply chain assets and
product, information, and fund flows to grow
the total supply chain surplus

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 Importance of
Supply Chain Decisions
• Wal-Mart, $1 billion sales in 1980 to $469 billion in

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2013
• Seven-Eleven Japan, ¥1 billion sales in 1974 to ¥1.9
trillion in 2013
• Webvan folded in two years
• Borders, $4 billion in 2004 to $2.8 billion in 2009
• Dell, $56 billion in 2006, adopted new supply chain
strategies

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 Key Point

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Supply chain design, planning, and
operation decisions play a significant role
in the success or failure of a firm. To stay
competitive, supply chains must adapt to
changing technology and customer
expectations.

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 Decision Phases in a Supply Chain
1. Supply chain strategy or design

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How to structure the supply chain over the next
several years
2. Supply chain planning
Decisions over the next quarter or year
3. Supply chain operation
Daily or weekly operational decisions

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 Supply Chain Strategy or Design
• Decisions about the configuration of the supply chain,
allocation of resources, and what processes each
stage will perform

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• Strategic supply chain decisions
– Outsource supply chain functions
– Locations and capacities of facilities
– Products to be made or stored at various locations
– Modes of transportation
– Information systems
• Supply chain design must support strategic objectives
• Supply chain design decisions are long-term and
expensive to reverse – must take into account market
uncertainty
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 Supply Chain Planning
• Definition of a set of policies that govern

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short-term operations
• Fixed by the supply configuration from
strategic phase
• Goal is to maximize supply chain surplus given
established constraints
• Starts with a forecast of demand in the coming
year

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 Supply Chain Planning
• Planning decisions:

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– Which markets will be supplied from which locations
– Planned buildup of inventories
– Subcontracting
– Inventory policies
– Timing and size of market promotions
• Must consider demand uncertainty, exchange rates,
competition over the time horizon in planning
decisions

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 Supply Chain Operation
• Time horizon is weekly or daily
• Decisions regarding individual customer orders

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• Supply chain configuration is fixed and planning
policies are defined
• Goal is to handle incoming customer orders as
effectively as possible
• Allocate orders to inventory or production, set order
due dates, generate pick lists at a warehouse, allocate
an order to a particular shipment, set delivery
schedules, place replenishment orders
• Much less uncertainty (short time horizon)
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 Key Point

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Supply chain decision phases may be
categorized as design, planning, or
operational, depending on the time frame
during which the decisions made apply.
Design decisions constrain or enable good
planning, which in turn constrains or
enables effective operation.

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 Process Views of a Supply Chain
1. Cycle View: The processes in a supply chain are

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divided into a series of cycles, each performed at
the interface between two successive stages of the
supply chain.
2. Push/Pull View: The processes in a supply chain are
divided into two categories, depending on whether
they are executed in response to a customer order
or in anticipation of customer orders. Pull processes
are initiated by a customer order, whereas push
processes are initiated and performed in
anticipation of customer orders.

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 Cycle View
of Supply
Chain

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Processes

FIGURE 1-3

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 Cycle View of
Supply Chain Processes

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FIGURE 1-4

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 Key Point

A cycle view of the supply chain clearly

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defines the processes involved and the
owners of each process. This view is useful
when considering operational decisions
because it specifies the roles and
responsibilities of each member of the
supply chain and the desired outcome for
each process.

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 Push/Pull View of Supply Chains

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FIGURE 1-5

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 Push/Pull View of
Supply Chain Processes
• Supply chain processes fall into one of two categories

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depending on the timing of their execution relative
to customer demand
• Pull: execution is initiated in response to a customer
order (reactive)
• Push: execution is initiated in anticipation of
customer orders (speculative)
• Push/pull boundary separates push processes from
pull processes

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 Push/Pull View – L.L. Bean

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FIGURE 1-6

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 Push/Pull View – Ethan Allen

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FIGURE 1-7

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 Key Point

A push/pull view of the supply chain

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categorizes processes based on whether
they are initiated in response to a
customer order (pull) or in anticipation of
a customer order (push). This view is
useful when considering strategic
decisions relating to supply chain design.

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 Supply Chain Macro Processes
Supply chain processes discussed in the two

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views can be classified into
1. Customer Relationship Management (CRM):
all processes at the interface between the firm
and its customers
2. Internal Supply Chain Management (ISCM):
all processes that are internal to the firm
3. Supplier Relationship Management (SRM):
all processes at the interface between the firm
and its suppliers

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 Key Point

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Within a firm, all supply chain activities
belong to one of three macro processes:
CRM, ISCM, and SRM. Integration among
the three macro processes is crucial for
successful supply chain management.

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 Supply Chain Macro Processes

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FIGURE 1-8

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 Examples of Supply Chains
• Gateway and Apple

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• Zara
• W.W. Grainger and McMaster-Carr
• Toyota
• Amazon
• Macy's

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 Gateway and Apple
1. Why did Gateway choose not to carry any finished-product
inventory at its retail stores? Why did Apple choose to carry

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inventory at its stores?
2. Should a firm with an investment in retail stores carry any
finished-goods inventory? What are the characteristics of
products that are most suitable to be carried in finished-goods
inventory? What characterizes products that are best
manufactured to order?
3. How does product variety affect the level of inventory a retail
store must carry?
4. Is a direct selling supply chain without retail stores always less
expensive than a supply chain with retail stores?
5. What factors explain the success of Apple retail and the failure
of Gateway country stores?

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 Zara
1. What advantage does Zara gain against the competition by having
a very responsive supply chain?

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2. Why has Inditex chosen to have both in-house manufacturing and
outsourced manufacturing? Why has Inditex maintained
manufacturing capacity in Europe even though manufacturing in
Asia is much cheaper?
3. Why does Zara source products with uncertain demand from local
manufacturers and products with predictable demand from Asian
manufacturers?
4. What advantage does Zara gain from replenishing its stores
multiple times a week compared to a less frequent schedule? How
does the frequency of replenishment affect the design of its
distribution system?
5. Do you think Zara’s responsive replenishment infrastructure is
better suited for online sales or retail sales?
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 W.W. Grainger and McMaster-Carr
1. How many DCs should be built and where should they be
located?

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2. How should product stocking be managed at the DCs? Should
all DCs carry all products?
3. What products should be carried in inventory and what
products should be left with the supplier to be shipped
directly in response to a customer order?
4. What products should W.W. Grainger carry at a store?
5. How should markets be allocated to DCs in terms of order
fulfillment? What should be done if an order cannot be
completely filled from a DC? Should there be specified backup
locations? How should they be selected?

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 Toyota
1. Where should the plants be located, and what

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degree of flexibility should be built into each? What
capacity should each plant have?
2. Should plants be able to produce for all markets or
only for specific contingency markets?
3. How should markets be allocated to plants and how
frequently should this allocation be revised?
4. How should the investment in flexibility be valued?

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 Amazon
1. Why is Amazon building more warehouses as it grows? How
many warehouses should it have and where should they be

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located?
2. Should Amazon stock every product it sells?
3. What advantage can bricks-and-mortar players derive from
setting up an online channel? How should they use the two
channels to gain maximum advantage?
4. What advantages and disadvantages does the online channel
enjoy in the sale of shoes and diapers relative to a retail
store?
5. For what products does the online channel offer the greater
advantage relative to retail stores? What characterizes these
products?

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 Macy's
1. Should online orders be filled from stores or
fulfillment centers?

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2. How should store inventories be managed in an
omni-channel setting?
3. Should returns be kept at a store or sent to a
fulfillment center?

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 GOPALJEE
• How can Gopaljee Supply and Distribution Model be

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extended to other business lines in the Indian and South
Asian context?
• Which all socio-economic features of South Asian societies
can be identified as the foundations for building sustainable
supply chains?
• How can the existing distribution channels in the South
Asian region be transformed to maximize the value
delivered to the customer?
• How can such indigenously developed SCM Models
integrate with and expand into global supply chains?

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 Summary of Learning Objectives
1. Discuss the goal of a supply chain and explain the

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impact of supply chain decisions on the success of a
firm.
2. Identify the three key supply chain decision phases
and explain the significance of each one.
3. Describe the cycle and push/pull views of a supply
chain.
4. Classify the supply chain macro processes in a firm.

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